Social Security's Looming Surpluses: Prospects and Implications.

Social Security's Looming Surpluses: Prospect and Implications.

Edited by Carolyn L. Weaver. Lanham, Md.: The AEI Press. 1990. Pp. xiii, 233. $32.95.

The 1983 Social Security Amendments shifted the system's funding from a cash flow (pay-as-you-go) objective to a present value (advance funding) objective. The rationale for reserve surpluses was the aging of the baby-boom generation; this generation is expected to help pay in larger measure for its retirement. Previous generations were paid out of economic growth rather than out of forced saving. As the proportion of the U.S. population over 64 rises from 12.4% in 1990 to 22.5% in 2060, workers per beneficiary will fall from 3.3 to 1.8 [Weaver, p. 6]. Combined OASDI (retirement) and OASDHI (hospital insurance) reserves (in current dollars) will first rise from $475 billion in 1990 to $15.4 trillion in 2025; and thereafter decline to -$333.5 trillion in 2060, due largely to OASDHI costs from 2030, with OASDI also negative from 2050 [Weaver, p. 4, using an intermediate forecast]. The reserves will equal nearly 30% of projected GNP in 2018 [Munnell and Ernsberger, p. 85]. The interest income will help reduce the need for future tax increases.

This collection of seven research papers (one by the editor), together with commentaries by distinguished discussants and an introduction by the editor, represents the proceedings of a 1989 conference held at the American Enterprise Institute. The authors and commentators are distinguished economists (including Alan Blinder of Princeton, James Buchanan the Nobel laureate, William Nordhaus of Yale, James Poterba of MIT, John Shoven of Stanford). The volume can be readily recommended to economists and others interested in either social security or federal budgeting. The high caliber of scholars involved indicates the excellent quality of the research reported.

The volumes examines "the economic, budgetary, and political consequences of the social security surpluses" [Weaver, p. 12. Among the important issues studied are the effects of advance social security funding on fiscal policy, national saving and budgetary politics (the reported federal deficit is reduced by the investment of trust fund surpluses in treasury issues); empirical evidence (for Canada, Japan and Sweden as well as for the U.S.) bearing on these issues; and future directions for policy and policy making [Weaver, p. 12]. The other three countries are also attempting to prefund some of their future pension liabilities, (amounting to 8%, and 18% and 30% of gross national product for Canada, Japan and Sweden respectively to date); their investment strategies have, however, had "varying degrees of success" [Munnell and Ernsberger, p. 118]. All three countries will have a larger proportion of elderly citizens in 2030 than will the U.S. [Munnell and Ernsberger, p. 91].

Weaver's introduction summarizes the forecasted pattern of reserve surpluses and deficits. Kotlikoff's chapter discusses construction of generational accounts as a proposed replacement for the official deficit measures. Chapters by Buchanan and Leonard examine budgetary politics. Munnell and Ernsberger examine cross-national data on national saving, while Crain and Marlow examine U.S. data on the casual relationship between social security and the federal budget. Lindsey studies the relationship between social security surpluses and the personal income tax. The final chapter by Weaver discusses reform options.

The key thread linking these studies together concerns how government decision making will respond to the growth in surpluses. "From an economic standpoint, it makes good sense to advance fund a pension program known to face a substantial and growing liability" [Weaver, p. 168]. Economists also tend to like force national saving for increasing the country's productive capacity. This preference assumes that saving is too low and should be corrected by government exaction rather than incentives. It is not clear that government-sponsored national saving is a good thing. The answer depends on what is done with the funds, including what investment strategy is pursued. A related debate is thus between investment in government bonds or in the private economy. As Makin [p. 41] states, "if we want to tell people how to arrange their consumption over their life cycles...then we should know what the optimal pattern of life cycle consumption is, and we do not." Weaver comments: "The accumulation of large trust fund reserves, while appearing to enhance the well-being of social security and the federal budget, carries real risks of undermining both. These riks were not considered in 1983" [p. 173]. Surpluses can be used to provide current consumption funding, higher benefits, tax cuts, or debt reduction [Blinder, p. 79]. Senator Moynihan recently proposed cutting the payroll tax, leaving that tax rate stable to 2012, and then increasing the tax rate in stages to 2045; his proposal would return the social security system to a pay-as-you-go basis [Weaver, p. 11].

Crain and Marlow [p. 120] argue that a "dynamic framework of budgetary behavior" in which tax and spending behavior can interact must be considered; "No binding rules on politicians dictate how surplus monies will be used" [p. 119]. Their econometric "evidence . . . provides support for the budget constraint hypothesis that past increases in social security revenues have led to an increase in federal spending," as have trust fund balances [p. 133]. However, social security programs do not appear to have encouraged large deficits in Sweden or Japan [Munnell and Ernsberger, pp. 99 and 103]; in those two countries social security is insulated from the general budget [p. 106]. In Canada, the provinces have been borrowing for current consumption purposes [p. 144]. The empirical experience is thus contradictory. The outcome will depend on the fiscal responsibility of government. The weight of recent evidence (the large U.S. deficit, budget dissensus, and the less than satisfactory performance of the Gramm-Rudman deficit reduction procedure) argues against the likelihood of such restraint in the U.S.

Ultimately, the wisdom of the advance funding scheme turns on its impact upon future economic growth. Social security tax rates will have to increase after 2035. The impact of forced national saving on aggregate economic variables (growth, interest rates, annual deficit) may be offset by other government policies. A crucial problem is that "Social security is off limits for serious political discussion and debate" [Buchanan, p. 45] due to its large and growing beneficiary group [Leonard]. The problems with social security have not been solved, merely deferred to the long distant time when insolvency will again loom. Duane Windsor Rice University